US Stocks Plummet As Greece Contagion Fears Grow

PeterA. McKay

U.S. stocks plummeted in a flashback to the panicked trading of 2008. Investors fled everything from stocks and risky bonds to commodities and poured money into safe assets such as U.S. Treasurys and gold.

The velocity of the plunge in stocks was breath-taking. At one point the Dow was down almost 1000 points before recovering.

Fears of contagion from Greece's debt crisis grew during the day and stocks were lower for most of the day. But many were at a loss to explain why stocks suddenly made such a staggering move.

A near 1,000-point drop is "people jumping out of windows" territory, said Gerard Cassidy, an analyst with RBC Capital Markets.

As losses piled up, the Dow Jones Industrial Average went into freefall, tumbling through 10000, before dropping as much as 998 points, or 9.2%. The biggest closing point drop in the Dow's history occurred Sept. 29, 2008, at the height of the financial crisis, when the Dow ended the day down 777.68 points, or 6.98%.

The Dow has since pared its losses but remains sharply lower, down 345 points, or 3.2%. The S&P 500 tumbled 3.1% to 1130 and at one point dropped as low as 1065.79.

Technicians said the market blew through key support on the S&P 500 at the 1150 level and then again at 1120 and 1115.

Key short-term credit markets--such as the market for three-month Libor--began to show signs of stress and corporate bonds tumbled.

With about an hour of trading to go, New York Stock Exchange composite volume has already topped 8 billion, making this the second-busiest day of the year in the market. The 2010 high was 8.4 billion shares, set on April 16 when the government filed fraud charges against Goldman Sachs.

Traders described Thursday's trading as driven largely by automated sell orders, which piled up after several technical barriers were breached, in particular the 1150 level on the S&P.

"A lot of people thought we had support around that level, so there was some disappointment that it didn't hold," said Phil Roth, chief technical analyst at Miller Tabak.

But he added: "The numbers themselves are a little less important than the manner in which the market gets there. The important thing is that we've had a very nontraditional bull market, without any major correction or several years of advances alternating with sideways periods. This could be the thing that sets off a real correction, but we'll have to wait and see."

Despite the drop on Thursday, "right now there is no difference in the U.S. economic recovery that we all were expecting."

Circuit breakers didn't come into play in halting the decline. The low came after 2:30 p.m., a time after which the NYSE doesn't halt trading unless the Dow falls by 20%.

In a flight to safety, investors snapped up U.S. Treasury bonds, pushing their yields as low as 3.27%, their lowest since last December. They recently traded at nearly 3.34%, still an unusually large decline from more than 3.5% at the start of the day.

Amid the carnage, gold also re-established its position as a safe haven, rising nearly 3% to move than $1,200, trading at its highest levels in five months.

Other fear indicators widened quickly, though were still much lower than ahead of the crisis in 2008. The spread between three-month Libor and overnight indexed swaps, which had been creeping wider in recent days, stretched quickly to 14 basis points, or 0.14 percentage point, from 9 basis points at the start of the day, the widest since last September. At the height of the crisis, that spread, a closely watched measure of credit risk, was wider than 100 basis points.

The Markit CDX index tracking the cost of insuring against the default of investment-grade corporations jumped more than 25% at the worst of the day's selloff to its highest levels since last July, and was recently up more than 20%.

Oil was down midday about 5%, and copper fell 1.1%, losing ground for the fourth consecutive day of trading. Prices for those raw materials, and a host of others widely used by consumers and industry, were driven down by mounting fears about stress from European debt woes and questions about Chinese growth.

"It's exactly the same thing" as what's troubling the stock market, said Edward Morse, the global head of commodity research at Credit Suisse. "The decline has been across the board, except for gold."

Bank of America was off 6.1%, while Merck and General Electric were off more than 3%.

Many were bewildered by the sudden slump.

"We're in total freefall right now," said Joe Benanti, managing director at Rosenblatt Securities. "It's a true flight to safety and to tell you the truth, people are seeing what's going on in Athens on CNBC and it's not helping the market at all. You're just watching things sort of melt away. I was thinking back to the fall of 1987. When you get these real downdrafts, you have people just walking away and waiting for it to find a floor because you don't want to get in when it's still falling."

Investors also remained deeply worried Thursday about the unfolding drama of Europe's efforts to prop up Greece's finances. Despite boisterous street protests, Greece's parliament passed a bill with austerity measures that will give the country access to an assistance package jointly offered by the European Union and International Monetary Fund. Other EU members will take votes in their respective parliaments soon to approve spending on the package, with a first test expected in Germany on Friday.

"A lot of traders are getting carried out of there seats. There are lots of liquidations including hedge funds out of riskier assets," Michael Franzese, head of Treasury trading at Wunderlich Securities in New York.

While the bailout is expected to pass in Germany and elsewhere, it remains unpopular among voters who don't want to see their respective countries' resources used to solve Greece's problems. Traders said that any hints of populist backlash could slow the package's implementation or lead to omission of elements needed to prevent global economic contagion.

"Some of the panic mode has come in now," said Jay Suskind, senior vice president at Duncan-Williams. "What you're seeing in Greece--even the pictures on the television with the protests starts to spark some real fear."

Investors said they were worried about potential contagion from Greece's ongoing problems, and whether eventual losses could even exceed those of the U.S. housing collapse.

"You worry about the a domino effect, from Greece to Portugal to Ireland and Spain," said Richard Schottenfeld, general partner of Schottenfeld Associates, a New York hedge fund. "Pretty soon, those kinds of losses are bigger than housing."

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